The History of Credit

I want to share some credit history information that was complied by a good friend. Enjoy!

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Not too many years ago, the credit world was much different than it is today.

Credit bureaus operated in near secrecy, gathering information in ways you'd not believe. Did you know that Retailer's credit (now Equifax) used to use information gathered about you from the Welcome Wagon representative? Quality of your home, furnishings, opinion of your character, etc? Trying to see what was in you report was nearly impossible. It could be absolutely wrought with error and incorrect information- you'd never know. Even if you did know, you couldn't correct it.

Lending decisions were made partly on the content of that report, and partly- sometimes mostly- on the whim of the underwriter at the bank you were applying at. If you didn't "look right"- or were of a minority group, or lived in the wrong neighborhood. etc- forget it.

That started to change as credit cards became popular in the late 1960's. There was no way to personally interview an applicant who lived states away from the issuing bank, nor could the credit reports available at the time be relied upon. Many disasterous lending decisions were made using the information in those reports.

Meanwhile, congress had begun investigating discrimination in housing loans, and the practices of collection agents. The result was the FCRA, enacted in 1971 and later the FDCPA in 1977.

The FCRA literally forced CRA"s to clean up their act. As the data in consumer reports became more standardized and more accurate lenders began to rely more on them, less on the underwriters' gut feeling.

Lenders begain to develop their own automated risk-scoring, but the results were inconsistent and inaccurate. The often still factored in things like age, gender, etc.

Fair Isaac and company capitalized on that movement, and on the push to reform mortgage lending by compiling their risk model scoring.

Finally released in the 1980's, it was touted as an impartial, consistent way to evaluate credit applications, taking the prejudice and instinct out of the equation.

Given that lenders were under pressure from Congress to eliminate discriminatory lending practices, FICO seemed like an answer to their dilemma. They jumped on it and have never really looked back. Many still do manual underwriting, and most employ an internal risk calculation of which FICO is only a portion. But those '60 s and '70s lawsuits and congressional action went a long way to eliminate the prejudice that had saturated the financial industries.

FICO has been accused over the years of still factoring race, age, gender into their equations, the most common complaint is that of zip-code discrimination. But in a historical sense, FICO did wonders to level the playing field. Not until very recent years could a consumer see their credit score- a remnant of that old secrecy pact. California's SB1607 was the first law to mandate consumer disclosure of scores- in 2000!

Here's the story behind inquiries, and why lenders can see them.

Inquries were not disclosed publicly on credit reports until the very late 1970's. THE FCRA requires them to be shown to you- but not to other lenders.

That practice was actually forced by a television commercial!

In the early-mid 1970's, there was a television commercial, selling a "get rich in real estate" package. The way it worked, was you would apply for 10-20 credit cards all at once. Since inquiries were not reported publicly, lenders had no way of knowing that you'd applied all over town, lol. Someone with an income capable of supporting 5K in credit could grab 60K in credit in a day.

You'd cash out all the cards, and buy a piece of property. Then you'd sell it quickly (flip!) and pay off the cards, keeping the profit. Repeat until you run into a property that does not sell......

The huge default that followed got the attention of the lenders, who pushed for the right to see your inquiries to prevent such exposure. That was the end of that TV commercial...and the foundation of inquiries changing from a disclosure to you of who's seen your report to a factor used in lending decisions. It was also one of the many factors resulting in the bankruptcy reform act of 1978.

TRW, Experian, and Microsoft

TRW Incorporated was involved in a number of businesses, mostly defense-related, but including automotive supply and credit reporting. At one time, TRW was the undisputed giant in credit reporting, having laid it's roots in business information then branching into consumer data. Credit reports were commonly called "a TRW report", a practice which some old-timers continue today.

...In his senior year, Bill Gates and Paul Allen were looking for opportunities to use their new skills... and make some money. The defense contractor TRW was having trouble with a bug infested computer system. TRW offered Gates and Allen jobs. "It was at TRW that Gates began to develop as a serious programer," and it was there that Allen and Gates first started talking seriously about forming their own software company....

( Hard Drive: Bill gates and the Making of the Microsoft Empire, James Wallace, 1993)

In 2002, Northrop Grumman acquired TRW's defense business, and TRW Automotive, became a separate company. Goodrich Corporation acquired TRW's Lucas Aerospace group. The credit reporting business, which was sold 1996, is now called Experian. Great Universal Stores PLC (GUS) is the current owner of Experian, which also owns the Burberry retail chain and is Britain's largest catalog retailer.

The origin of the company was in the Cleveland Cap Screw Company founded in 1901, which eventually became Thompson Products. The 1958 merge of Thompson with the Ramo-Wooldridge Corporation was named Thompson Ramo Wooldridge Inc., then shortened to TRW Inc. in 1965.

TRW was one of the first companies to build air bags in the 1980s, but problems with the bags forced a huge recall by Ford Motor. It was the beginning of the end of TRW. TRW also ran into asbestos problems, having used the material in the 1970s in brake liners. Strike two....

The 1999 acquisition of the British aerospace and automotive parts maker LucasVarity saddled it with so much debt that it had to start selling businesses, with the result that Northrop Grumman was able to conduct a hostile takeover of the company, ending TRW's reign as the heavyweight player it once was.

We wouldn't need credit reporting, were it not for Edwin

Years ago, in the early days of our country, settlers moved to various parts of the country. As the population grew, they set up businesses, normally a general store, a tavern, and later- a bank. General stores at the time would often extend credit to the community, people purchasing what they needed, the storekeeper keeping track with pencil and paper. As those people brought their goods to market to sell, they'd return to pay off the storekeeper.

Everyone except Edwin, that is.

At some point, now lost to history, the merchants in some town all gathered for a morning coffee klatch to discuss business. The owner of the general store mentioned Edwin, and how he hadn't paid his bill last month. The livery owner chimed in with a similar experience. The other store owners hadn't dealt with Edwin yet--but they'd make a note that Ed was to be cash-only should he stop into their establishment.

Edwin, at that point, was the first settler to officially have bad credit!

The shopkeepers began to see value in sharing information, and agreed to keep notes on who they were having trouble with. Additionally, they agreed to meet every so often and share that information. Eventually, the list grew longer and needed to be written down... The first "credit report" was thus born!

The origins of credit reporting were keeping track of negative experiences only- those who did not pay- or paid late- a tradition that stuck with credit reporting for years, and still has an strong influence on it today. As the settlements grew into cities, these informal meetings became more organized, eventually taking the name "mutual protection societies" .

A mutual protection society was the forerunner of CRA's as we know them today, organized to keep track of people who had burned a merchant.

Time progressed and people like Edwin became more mobile. It wasn't hard for someone with a bad rep. to pack up and move to the next town down the road. To combat this, the Mutual Protection Societies began to join together and cover larger territories. Communications were slow years ago, slowing the expansion of the societies, requiring them to be at best- regional in nature. Again, that regionality is a characteristic that only recently has begun to disappear.

If a little data is good.....

One of the larger Mutual Protection Societies was Retailers Credit, in Texas. Retailers credit began to realize the value in consumer information, and began to gather data that went over and above basic non-payment information. At one point, Retailers Credit actually partnered with Welcome Wagon, adding reports from the Welcome representative to a consumer's file. File was an appropriate term, the data was kept on a paper ledger sheet, in a file carrying your name. Rows of file cabinets contained the data, a practice unchanged until the development of mass computer storage in the 1960's.

Business was incredible for Retailers credit, although they only covered the southern parts of the country. In the north, Merchant's Credit Guide and Credit Bureau of Cook Couty were covering the Chicago and Midwest areas. Edwin could still move around to escape his past, but it was becoming more difficult. No longer could he move one town over....now Ed had to move to an entirely different geographic area.

Retailers Credit changed their name to Equifax, and began branching out to the west, the northwest and the southeast, setting up satellite offices to cover those parts. That practice remains today, with certain parts of the country still using an Equifax affiliate such as CSC.

The Union Tank Car Company of Chicago, a railroad leasing company, had been keeping track of rail-related data and saw an opportunity to branch out into consumer data. Union Tank purchased the Credit Bureau of Cook County in the late 1960's, and it's approx 4 million ledger-card files.....contained in 400 seven-drawer cabinets. TransUnion was born! TransUnion was the first to pioneer tape-based data storage allowing it to branch out and cover larger territories without the need for branch offices.

Meanwhile TRW had jumped into the credit reporting business. TRW had it's fingers in all sorts of industries, primarily defense contracting, and military data and communications. This gave TRW access to the newest technology and computing power that the others didn't have....TRW was the first to provide credit data on demand by electronic- real-time means.

No longer having to wait for the US mail, or relying on a phone call- TRW's electronic reporting propelled it to the top of the heap, becoming the largest repository of credit information in the world. Edwin's days of hiding from his past were over, TRW had the ability to store data on anyone regardless of geography, and provide it to anyone, anywhere in a matter of hours. They were truly the first nationwide credit data repository.

Consumer reporting was largely a USA thing, other countries eventually followed but it was years later before they caught up... many still do not compile such information.

TransUnion stuck mostly with it's original mission of keeping credit-related data only, Equifax and to a lesser extent TRW, had compiled additional personal data, and opinion, character reports, commentaries from neighbors and insurance agents....an unregulated industry gone hog-wild, lol. It was truly a "consumer report" that Equifax provided, containing much more than mere payment history.

Secrecy was strictly kept, lenders were not allowed to disclose the content of a consumers file to the consumer....violaters were dealt with harshly, resulting in denial of access to any further reports, and occasionally lawsuits over confidential trade information rights. The CRA's refused to make consumer disclosures. You didn't know what was in your file, nor could you correct any errors. The CRA"s were an industry without regulation, and consumers began to fear them, realizing the unchecked power that they were amassing.

Not until congress stepped in in 1971 did these practices begin to change, and credit information become more standardized and regulated. Consumers were finally given the ability to see their files, and to dispute errors therein. As light was shed on the CRA's practices, they began to clean up their formerly secretive and sometimes abusive act...the FTC was given charge to keep the CRA's supervised, and occasionally report back to Congress on their progress. This has resulted in changes and amendments to the FCRA occasionally.

However the CRA's and the banking industry make for a very powerful lobby....many of the rules have been watered down from the FTC's original recommendations under the lobbyist's pressure.

A brief history of credit cards

and why It's Bank of America's fault you have to go to the bank during your lunch hour.

1950- the Diners Club issued the first credit card in the United States, useful for New York restaurant bills only. 27 restaurants accepted the card as payment.

1958- American Express first issued cards usable at various retailers, not restricted to restaurants. Not truly a credit card, charges were required to be repaid monthly.

1958- BankAmerica issued the BankAmericard (now Visa), the first bank credit card. They are Bank of America now, after merger with Nations bank in 1998. This was truly a credit card, not requiring the full balance to be repaid monthly.

1966- the Interbank Card Association was formed, later known as Mastercharge, and Mastercard. This was the first credit card that was issued by multiple banks.

1986- Dean Witter Financial Services Group introduced the Discover Card. Sears Consumer Financial Corporation changed its name to NOVUS Credit Services Inc in 1993, and they all became Morgan Stanley following a merger in 1997.

Back in the 1940's, BankAmerica was the largest bank on the west coast. Soldiers in WW2 were using the bank quite heavily, resulting in the need to close the bank at 3pm in order to process the checks by 5pm!

BA pioneered modern electronic check recognition and processing in order to cope with the volume of checks, and as a result- had significantly higher efficiency than other banks. What took many man-hours at other banks was done via automation at BankAmerica.. This efficiency and speed allowed it to expand, and in the 1970's, it became the worlds' largest banking institution. Citibank later took that distinction, outgrowing BofA by purchasing up several smaller banks. Citibank is now being challenged by HSBC.

Re: The History of Credit

Thanks for this history. I've been looking for why FICO (Fair Issac Corp) started this formula for consumer credit. The reason I'm seeking an answer to "why" is because it seems the formula is more beneficial to the lender (obviously), but almost too beneficial. Here's why I say this.

When a poor credit risk is identified, instead of having their credit "cut off" automatically, many times they are charged a higher interest rate. This creates a situation where they will owe more money. If they initially had a problem paying their debts, then how does charging them more money help them - or the lender? A poor payment history and a large amount of debt is 65% of their FICO score - only 10% of their score weighs the amount of credit the APPLY FOR! Wouldn't increasing the percentage of the latter help reduce an individual's risk of building a large amount of debt? No credit, no charging. It makes sense to me, but it seems that banks would no longer make the money they are making now off of these individuals. So the solution to me is to simply cut off a person's credit when they begin seeking too much credit. This will prevent debt from accumulating. The way it is set up know allows a poor credit risk to build debt and never be able to pay it all off (just minimum payments, which we know is the kiss of death).

So the FICO score is designed to unfairly benefit lenders by allowing poor credit risks to saddle themselves with debt.

Re: The History of Credit

Thanks for this history. I've been looking for why FICO (Fair Issac Corp) started this formula for consumer credit. The reason I'm seeking an answer to "why" is because it seems the formula is more beneficial to the lender (obviously), but almost too beneficial. Here's why I say this.

When a poor credit risk is identified, instead of having their credit "cut off" automatically, many times they are charged a higher interest rate. This creates a situation where they will owe more money. If they initially had a problem paying their debts, then how does charging them more money help them - or the lender? A poor payment history and a large amount of debt is 65% of their FICO score - only 10% of their score weighs the amount of credit the APPLY FOR! Wouldn't increasing the percentage of the latter help reduce an individual's risk of building a large amount of debt? No credit, no charging. It makes sense to me, but it seems that banks would no longer make the money they are making now off of these individuals. So the solution to me is to simply cut off a person's credit when they begin seeking too much credit. This will prevent debt from accumulating. The way it is set up know allows a poor credit risk to build debt and never be able to pay it all off (just minimum payments, which we know is the kiss of death).

So the FICO score is designed to unfairly benefit lenders by allowing poor credit risks to saddle themselves with debt.

Has there ever been a movement to change up this percentage?

Welcome to the forums!

I think there's an assumption here that FICO is the final arbitor with regards to credit. It's not. If you look at your soft pulls within your CR, you'll find that many of your creditors are looking at your report monthly, for the most part, and others less frequently. They are looking to see if you are adding more credit while keeping balances on your existing accounts, if you are late, how you utilize the balances you have, etc. While a FICO score can be generated off a soft pull, lenders don't always look at that. For example, Barclays is known to close their account with you just because you added more credit cards. The Hooters CC has been known to close your account just because you added a mortgage. You can also have high balances with FICOs in the 700s, and still face CLDs just because your lenders think your utilization is too high. In each of these examples, FICO can remain high, relatively unchanged in many cases, but still face adverse action based on non-FICO info.

As for increasing the APR, it's up to the debtor whether or not they want to charge more. They can opt to pay it off, shelve it, etc. Adding more credit by that person won't get them any further out of debt. In fact, you aren't likely to get approved if you are defaulting anyway and CCCs have been known to cut your limits if the balances are too high, you aren't paying it off fast enough, etc. That's based on what the creditor sees in their own records or via soft pulls. The moment you have a late payment showing is the moment all future credit stops anyway (except for a few trash cards). And if you are late, your CCCs won't let you charge anyway until you are current once again. That's not a function of FICO. And if a debtor gets to a point they can't pay a CC, that's their own doing. Even if you immediately stopped all credit access as proposed, the balances will still get higher and higher if they aren't paying.

BTW, I think the score should punish you more for higher debt. IMO. That 30% or 35% should bump up, not down.

Re: The History of Credit

It took a while to read the OP and the two replies, but I have to say, Wow!!!!

That was a great read, very educational, I am so glad this post was resurrected and I found it, most likely one of the best posts I've ever read, I found myself trying to imagine what it would have been like in the early days described in the post.

Thank you Tuscani for posting this, what a wonderful post.

@ scarolan & IIecs, great follow ups to the OP, I enjoyed reading your replies as well, just an overall perfect Thread.

Re: The History of Credit

I'm not sure that you're understanding what my question is. My concern is that a lender will decide the interest rate on the debtor due to a low FICO score. A low FICO score, more times than not, inidcate a person who is struggling with finances. A debtor may get desparate and think that more credit will help them out of their situation. Once they do this, they are approved and charged a large interest rate, all the while they are paying a minimum payment that will never get them out of debt.

My question focuses on the potential for abuse by new lenders to charge high interest rates on drowning debtors who are still able to attain credit (because they pay their minimum payments). Payment history doesn't catch a person who pays the minimum payment and cannot afford more credit. Payment history simply shows someone who can pay a minimum payment. Stopping new credit can prevent large debt from accumulating.

For those who still have the thirst for history and would be interested in a paper that details the workings of the CRAs and led up to the enactment of the new Direct Dispute process, bypassing the CRA dispute process, I suggest the following very detailed analysis, which can be obtained by a quick Google on the name of the submitter, Leonard A Bennett:

Testimony

Before

Subcommittee on Financial Institutions And Consumer Credit

of the

COMMITTEE ON FINANCIAL SERVICES

Regarding

"Fair Credit Reporting Act: How it Functions for Consumers and the Economy"

Re: The History of Credit

I'm not sure that you're understanding what my question is. My concern is that a lender will decide the interest rate on the debtor due to a low FICO score. A low FICO score, more times than not, inidcate a person who is struggling with finances. A debtor may get desparate and think that more credit will help them out of their situation. Once they do this, they are approved and charged a large interest rate, all the while they are paying a minimum payment that will never get them out of debt.

My question focuses on the potential for abuse by new lenders to charge high interest rates on drowning debtors who are still able to attain credit (because they pay their minimum payments). Payment history doesn't catch a person who pays the minimum payment and cannot afford more credit. Payment history simply shows someone who can pay a minimum payment. Stopping new credit can prevent large debt from accumulating.

Thanks for the quick response.

I understand completely what you are saying. But banks, credit card companies, auto lenders, mortgage lenders are all out to get money. The lower the score, the higher the interest, the more money they get. They aren't your best friend looking out for your own good.

Re: The History of Credit

I'm not sure that you're understanding what my question is. My concern is that a lender will decide the interest rate on the debtor due to a low FICO score. A low FICO score, more times than not, indicate a person who is struggling with finances. A debtor may get desperate and think that more credit will help them out of their situation. Once they do this, they are approved and charged a large interest rate, all the while they are paying a minimum payment that will never get them out of debt.

My question focuses on the potential for abuse by new lenders to charge high interest rates on drowning debtors who are still able to attain credit (because they pay their minimum payments). Payment history doesn't catch a person who pays the minimum payment and cannot afford more credit. Payment history simply shows someone who can pay a minimum payment. Stopping new credit can prevent large debt from accumulating.

Thanks for the quick response.

Your solution to the problem although noble (well intentioned), would create the following situation. A person might be having a temporary set back and need to borrow more money but is willing to pay the interest, tighten his belt, work twice as hard, and work his way out of debt. He still needs operating capital to continue without defaulting on some bills and having his credit trashed for possibly 7 years. You would have the banks or society protect him from himself by cutting off all credit because he is STARTING to APPEAR like a risky borrower.

Cutting people off from credit at the early "risky" stage would be like telling them to default now and try to rebuild credit again in a few years. The existing system mitigates the risk that person might present to lenders who don't suddenly cut him off from credit. All people at his "risk" level, are pooled and charged a slightly higher interest rate so that the lenders are compensated for the 5% or so people (who are at his risk level) who will eventually actually default on their debts.

Some people work their way out of debt from the above mentioned level of risk, and eventually get somewhat lower interest rates. Others end up going deeper into debt and now have a higher chance of defaulting. At that risk level 10% of the pooled risks are projected to default so the interest rates are raised again to cover costs of the projected defaults. At some point some people do go all the way down the slippery slope to higher and higher interest and eventually BK.

At least under the current system people have choices. By trying to protect people from themselves presumably by more laws, one denies credit to people who only have minor setbacks and are willing to do what it takes to work out of debt.

Sure the system is abused, especially by the banks. It is however what it is. If we try to radically change it, the lenders will find new ways to maximize their profits. When that happens those who can least afford it will be hit with additional fees and higher ongoing interest rates.

The problem is not the lenders. It is human nature. If a person has financial misfortune and needs to cary any debt at all, that person should realize that living debt free should be the goal no matter what it takes. Temporary debt is necessary at times, and the interest rate incurred by temporary debt is relative low. Long term debt is simply a situation of the borrower being slave to the lender. The longer and deeper a person is in debt, the higher the interest cost.

I agree with your premise that lowering interest rates may help some people get out of debt faster. Unfortunately most will simply use the lower cost of borrowing to excuse racking up more debt. The banks are in business to make money, not help people out of debt.

Simply out the banks make money from people who pay them. A certain percentage will end up defaulting (not paying). The banks just play the odds. Lend to more people who will pay than won't pay. In the end FICO scores are just the "odds that a creditor will be repaid". At a race track you can bet on a favorite or a long shot. When a bank bets on a favorite with a high FICO score and low outstanding debt the bank is willing to accept a smaller pay off. If the bank is betting on a 100 to shot (low score high debt), the bank wants a higher pay off if it actually ever gets paid all that it is owed.

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